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Sector in the news: The energy companies
Public anger has been directed at energy companies in recent days, says Phil Oakley. Yet, these two providers could be worth buying for the long term.
The big energy companies are hiking their prices again. It's understandable that this is unpopular with consumers but while Labour leader Ed Miliband might think that freezing prices is the answer to this problem, it isn't.
It's difficult to say that the energy market works well for consumers. That's because none of the big players seems to be able to offer us consistently cheaper prices.
When they all increase prices at the same time, it's easy to accuse them of acting like a cartel. But they don't. Most of the costs of electricity and gas are out of their control and have been going up in recent years.
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The energy companies are not ripping us off either. However, comments by some politicians who say that these firms are guilty of extracting extortionate prices have frightened investors and have led to the share prices of Centrica (LSE: CNA) and SSE (LSE: SSE) falling sharply in recent weeks.
Yet on Monday this week, the government agreed to guarantee the building of a new nuclear power station at Hinkley Point in Somerset with power prices that are twice the current market rate.
Consumers will have to face facts. If the lights are going to stay on, they will have to pay much higher prices in the future than they do today.
Cheap gas from the North Sea and electricity generated from old power stations have kept prices relatively low compared with those in other countries. With the gas running out and power stations coming to the end of their working lives, that is going to change.
Neither SSE nor Centrica are making massive profits, though. SSE's retail energy business lost money during the first six months of 2013, while the company's pre-tax profits have barely moved for the past five years despite it investing billions in electricity assets.
Centrica argues that it makes a similar profit margin to Tesco and that this is not excessive. In a letter to the Financial Times a couple of weeks ago Centrica's finance director stated that the £3bn it had invested in power stations had delivered an after-tax return of just 5% hardly an excessive profit.
Sure, there's a chance that a future government may disrupt the current status quo, but it will also need to encourage new investment. Assuming common sense prevails, both Centrica and SSE look oversold right now.
Given that they offer decent dividend yields of 4.7% and 6.1% respectively, the shares look a reasonable choice for patient, long-term investors.
Verdict: buy Centrica, buy SSE
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